DBRS Confirms Morguard REIT at BB (high) with Stable Trend

DBRS has today confirmed the Issuer Rating of Morguard Real Estate Investment Trust (Morguard or the Trust) at BB (high) with a Stable trend. The rating takes into consideration the following strengths: (1) stable core of retail properties and government-leased office buildings; (2) consistent occupancy in the mid-90% range; (3) good asset type diversification; and (4) good financial credit metrics. The rating also reflects the following challenges: (1) above-average property concentration; (2) relatively small portfolio; (3) below-average geographic diversification; and (4) some exposure to Hudson’s Bay Company (HBC) and Sears and near-term office releasing.

Morguard achieved reasonable growth in operating income in 2011, mainly as a result of full-year cash flow contributions from property acquisitions in 2010. Morguard’s portfolio continues to achieve solid occupancy DBRS Confirms Morguard REIT at BB (high) with Stable Trend levels (95% as at Q4 2011), with good support from the Trust’s core enclosed shopping centres and government office tenancies. Morguard’s same-portfolio net operating income (NOI) growth was reasonable during the year at 2.6%, benefiting from higher rental rates on leasing activity in the retail segment of the portfolio and higher occupancy rates in the industrial segment, which more than offset flat results in the office segment.

From a financial profile perspective, Morguard financed property acquisitions in 2011 mainly with debt. The Trust, however, continues to maintain a conservative financial profile, with EBITDA interest coverage improving to 2.68 times for the year ended December 31, 2011 from 2.60 times in 2010. Higher cash flow levels and a conservative financial profile have also supported an increase of 6.6% to the Trust’s annual distribution per unit announced in Q1 2012.

The Stable rating outlook takes into consideration DBRS’s expectation that Morguard will continue to achieve reasonable operating income growth, due to cash flow from recent property acquisitions, notably the Trust’s 50% interest in two office complexes in Alberta, including Citadel West in Calgary and Petroleum Plaza in Edmonton. These properties are under long-term leases to high-quality tenants (Government of Alberta and WorleyParsons Limited), and are fully occupied at 100%, which should enhance cash flow stability going forward. DBRS also expects Morguard to operate with a conservative payout ratio in the 80% range under the new annual rate of distribution and continue to pursue property acquisitions while maintaining an EBITDA interest coverage ratio of above 2.30 times.

DBRS also believes that Morguard’s financial flexibility (positive free cash flow position and $51.2 million of liquidity), when combined with modest debt maturities in 2012, provides additional support to the current rating. A negative rating action could result from weaker operating and earnings performance and/or sustained EBITDA interest coverage below 2.30 times. On the other hand, a rating improvement would likely be the result of: (1) a material increase in portfolio size; (2) improved property and geographic diversification; (3) a significant improvement in earnings; (4) and/or moderation of financial leverage that results in a sustained increase in EBITDA interest coverage above 3.00 times.

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The applicable methodology is Rating Real Estate Entities, which can be found on our website under Methodologies.